Stock markets rallied on Thursday morning as fears of a French debt downgrade abated, and the Italian finance minister prepared to present an austerity budget.

The FTSE 100 index in London climbed more than 100 points to 5108 in early trading, a gain of 2% that wiped out much of Wednesday's losses. Markets are eagerly awaiting a new austerity plan for Italy, which will be presented by Giulio Tremonti in Rome at 11am local time (10am BST) despite some opposition from unions.

George Osborne is due to to speak in London at about 1pm at a special sitting of parliament called after the recent rioting in the capital and across England. He is expected to defend his austerity measures, at a time when Europe's debt crisis is deepening and Labour politicians have latched on to the Bank of England's warning that the outlook is worsening.

France's CAC and Germany's Dax both rebounded 2.4% in early trading, while Italy's MIB was up 1.3%, Spain's Ibex added 1% and Portugal's PSI rose 1.8%.

Share prices in Europe had slid on Wednesday when France was sucked into the eurozone debt crisis. Rumours swept the financial markets that Standard and Poor's (S&P) would strip France of its top AAA credit rating, following its downgrade of the US last week. Nicolas Sarkozy, the French president, cut short his holiday and said plans to reduce his country's budget deficit would be announced within weeks.

Shares in Société Générale, which plunged 15% on Wednesday amid rumours that France's second-largest bank was in serious financial trouble, bounced back with an 8% rise. Its chief executive Frederic Oudea dismissed rumours of liquidity problems as "absolutely rubbish" late on Wednesday.

Growth is key

Despite speculation about an imminent downgrade of France by S&P, analysts said this was unlikely. "S&P is not going to downgrade France any time soon. Nor are Moody's or Fitch," said Gary Jenkins, head of fixed income research at Evolution Securities. He noted S&P's statement last week when it cut the US AAA rating. "When comparing the US to sovereigns with AAA long term ratings … the trajectory of the US's net public debt is diverging from the others … in contrast with the US, we project that the net public debt burdens of these other [AAA rated, including France] sovereigns will begin to decline, either before or by 2015." This statement gives France some time, Jenkins said.

"Growth will be the key to the stability of the ratings for France, the UK and the US over the next 12 months. As we have said before significant slippage from agency expectations could well put pressure on the ratings of all three by this time next year and no doubt there will be a lot of attention on the French GDP numbers out this Friday. France faces one extra challenge to the others which is a possible build-up of contingent liabilities in order to assist other EU sovereigns."

Bank of England governor Mervyn King said on Wednesday that the greatest threat to Britain's economic recovery came from the eurozone debt crisis, and that these "headwinds are becoming stronger by the day". The Bank signalled that interest rates would stay on hold for a prolonged period as it cut its growth forecasts for the UK.

"The downgrade by Fitch of Cyprus to 'BBB' with a negative outlook was a timely reminder of the interdependency of European countries and their banking systems," said Michael Hewson, market analyst at CMC Markets.

"Despite reaffirmation by all three ratings agencies of France's sovereign rating investors remain exceedingly cautious as spreads continue to widen between French and German bond yields. The fact is the European banking system is creaking like an old ocean galleon and despite the largely successful attempts by the European Central Bank to push 10-year bond yields for Italy and Spain lower, the reality is they will need to buy an awful lot more to get them down to sustainable levels well below 5%."

Since the ECB started buying up Italian and Spanish debt on Monday, the yield, or interest rate, on the 10-year Italian government bond has fallen from over 6% to 5.06% while the Spanish equivalent is at 5.02%.